Value Investing Strategies of Warren Buffett and Benjamin Graham

Archive for the 'Robert Miles' Category

Warren Buffet’s 24-year-old wallet was previously sold for $240,000 at a charity auction. Inside the wallet was a personal item that reveals ten secrets of Warren Buffett.

The momento that was kept by Warren Buffett was a $50 bill issued by the Illinois National Bank and signed by Eugene Abegg, the owner and founder.

In what way does this item contain the secrets of Warren Buffett?

Well, one of Warren Buffett’s early purchases was that of Illinois National Bank. According to Warren Buffett expert Robert P. Miles, this purchase provides an excellent example of ten investment and management principles of the great investor.

Without going into details, here are the ten principles as explained by Robert P. Miles.

1) Invest in an old economy company that’s a leader in an industry you understand.

2) Invest in companies with consistent earnings.

3) Pay only a reasonable price even for an outstanding business.

4) Buy a lot of the company, and keep it.

5) Invest in businesses with experienced managers in place.

6) Leave talented managers alone to do their jobs and compliment them from a distance.

7) Buy companies from owners who care more about who’s buying the business than how much they’ll get for it.

8) Invest in companies whose managers are frugal and care about costs.

In this interview with Robert Miles, Al Ueltschi, an aviation pioneer and legend, talks about all aspects of his business from starting out as a Kentucky farm boy, to teaching himself to fly, buying his first plane, becoming the first corporate pilot of the founder of Pan Am, starting in the marine terminal at NYC’s LaGuardia Airport, and eventually selling to Warren Buffett.

Listen to a man who has lived the total lifespan of aviation, from man’s first flight across the Atlantic Ocean to landing on the moon. A inspiring tale of a man of vision, a pilot, an entrepreneur, and a philanthropist, who founded and built FlightSafety into the largest pilot training company in the world, and now a wholly owned subsidiary of Warren Buffett’s Berkshire Hathaway.

This video may help the viewer understand the qualitative [non measurable] aspects that Warren Buffett may consider when making an investment. Al Ueltschi’s business success may touch your mind, but what he has done with that success may touch your heart.

First a Dream, a book by Jim Clayton, influenced Warren Buffett to buy over Jim’s company after he had read the book.

Here’s a one hour video of an interview of Kevin Clayton, the son of Jim Clayton and CEO of Clayton Homes. The interviewer Robert Miles asks a series of questions covering all aspects of the business from getting started, to taking over from his father, and to selling to Warren Buffett.

The video may also help the viewer understand the qualitative aspects that Warren Buffett may consider when making an investment.

Well, at least some light refreshments were provided this time round. They must have heard our complaints in the morning. :)

Back to session 4 of the seminar.

When paying for any share, you would want to pay less than the intrinsic value that you have calculated. Why? In the calculation of the intrinsic value, a lot of it is done by estimation and it is impossible to get a ‘correct’ value. The lesser you pay, the higher your margin of safety.

The stock market is just like an auction process. Prices can go rock bottom or sky high. But whatever the price, remember that no one can force you to participate. You always have the choice of bidding or not bidding.

We are then shown a comparision of Warren Buffett 40 years against Lou Simpson’s 25 year investment performance. Lou Simpson manages GEICO Equities and is one of those possible candidates to succeed Warren Buffet.

He has a return of 20.3% versus Warren’s 21.9%. Quite a close match but if we look at just the last 5 years, he has actually outperformed Warren. An interesting observation about Lou’s portfolio is that his top 10 shareholdings are totally different from that of Warren’s.

The lesson to be learned is that copying a winning portfolio is not a guaranteed formula for investment success. At different times of purchase, many factors would be different and the buying decision derived earlier might not hold anymore. Independent thinking is important.

For those who can’t resist a stock tip, one of Warren’s latest acquisitions is Bugweiser. The current share price is actually slightly lower than his purchase price. What are you waiting for? :)

The seminar ended by revealing the winner of the valuation contest. The correct answer was 80 million which Warren paid for Disney. My answer of 71 million was close but not close enough. A student of 21 yrs old actually won the prize with 79.x million. Lucky fellow. His (totally irrational) method of using 30% over book value actually won him the tickets to Ohama!

Ironically, I had read an article on Disney earlier in the morning inside Forbes magazine. What a coincidence!

Overall, I would say that the attending the seminar would be well worth it for those who are starting out in investment. Having the right mindset would save you from a lot of heartache and losses which will surely be more than that five hundred dollars.

For myself, I was a bit disappointed. I had already been a follower of Warren Buffett and I would have expected a bit more for the money that I paid. Oh well, one good thing that came out of it is my decision to start this site. :)

Ok. Lunch was much, much better than tea break. At least it was provided. :)

I managed to eat my appetizer of salad and soup, main course inclusive of some seafood and oysters, and dessert of some fruits and pastries. With an extremely full stomach, I proceeded back to the seminar…

Session 3 started with a question, “How much would you pay for a machine that paid you $1 per year for 10 years?” There were different answers from the participants and most answers were within reasonable limits.

Other than using gut feel, this question is actually a simple financial mathematics problem involving the calculation of the present value of a series of cash flows. If you use a reasonable number for the interest rate, you should get a reasonable answer.

In the graph below, the straight line shows the value of a business while the curly lines shows the market value of the same business. What does this tell you?

“When you invest in stocks, always treat them as businesses. Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.” Are you an investor or a speculator?

We were then taught Benjamin Graham’s simple formula for calculating the intrinsic value of a stock.

IV = Current Earnings x (8.5 + twice the annual earnings growth rate)

We were shown Robert’s own formula which was slightly modified to take into account the percentage. It didn’t made any sense to me but the calculations worked out fine with his formula. I suspect the Ben’s formula that he gave us wasn’t stated in the original form. Guess I will have to look it up in his book.

Now came to the much awaited part of the seminar. We were given some data and were asked to value a company . The person who got closest to the answer (the price that Warren actually paid) without going over would win a pair of tickets to the next Berkshire annual general meeting. There would even be a visit to one of the companies hosted by Charlie Munger. Wow!

I decided to base my answer using the present value of the earnings for the next 10 years. Time to take out my calculator. Ops..didn’t bring them. Ok, should still be able to survive since Warren doesn’t use any computers too. He uses paper arithmetic or at most just a simple calculator. I can always rely on my handphone then. HOW IN THE WORLD CAN YOU CALCULATE A COMPLICATED FORMULA INVOLVING THE POWER OF TEN USING YOUR HANDPHONE???

“Time’s up. Does anyone need any more time?” Running out of time, I decided to use the simple Benjamin Graham formula. Hmm..the answer seems a bit high and it can’t be that easy. Otherwise, everyone will end up with the same answer. Ok, I will discount it 50% to include the margin of safety. Maybe just add a bit to my final answer in case anyone uses the same method.

I handed in my answer grudgingly and went for the tea break session. They should have given us more time….

I was looking forward to the tea break at the end of the first session as I was feeling hungry. To my utmost surprise, there were no refreshments provided. Not even any finger food! The organisers must be trying to get their full ‘value’ for money…

What they had, however, was a booth selling some of Robert Miles products. There was a bundle of 3 books and 2 audio sets selling for a discounted price $200.

I find it wierd that they were only selling the bundle and not the individual products. Surely, there were people who only wanted to get 1 or 2 of the items but not all?

Back to the seminar. In the second session, we were told the character or traits that we should look for in the managers of the companies that we were going to invest in. 6 pillars of character are trust, respect, responsibility, fairness, caring and patriotism.

3 traits that Warren looks out for were integrity, intelligence and energy. And how does he do that? Simply by reading the annual reports of the company! By following the annual reports for many years, it is sometimes possible to tell whether what was stated in previous years have been acted upon.

This was followed by a presentation on the key managers of the various subsidiaries of Berkshire. This was quite a boring segment and I actually dozed off…

A common trait was that these people really had passion for their business. They were working even up to 80, 90 years old and retirement was simply not an option. If you liked what you were doing, why should you retire to sit at home doing something else?

In a nutshell, two quotes to always keep in mind:Invest with people you like, admire and respect.Sell when they are not managing the business for the benefits of shareholders.

In this session, we are shown the awesome track record of Warren Buffett. In just 40 years, the earnings of Berkshire Hathaway has grown from one million to eight billion dollars. And the stock price has grown from $7 to $80,000. That’s ten times the price every ten years!

Here’s a self-made billionaire who as a kid, started off by delivering newspapers (Later on, this also turned out to be one of his best investments, Washington Post). His investment methods were taught by Benjamin Graham. I would certainly be getting hold of the two investment classics written by Ben, The Intelligent Investor and Security Analysis.

One thing that Warren values is reputation. He once told his son:”It takes a lifetime to build a reputation and only five minutes to ruin it. And if you think about that, you might do things differently.”

In his annual letter to his managers, he always begins it the same way:”Dear all-star manager, we can afford to lose money. In fact, we can afford to lose a lot of money. But never do anything in business that you wouldn’t want published on the front page of your local newspaper written by an intelligent but critical reporter.”

If we look at the recent scandals in the corporate world, we can see many cases of management ‘cooking’ the books to make their earnings report look good as well as enhance their own performance bonus. All these takes place at the expense of shareholders!

The character and values of the management is certainly something to look out for next time we read those annual reports. Using Einstein’s famous formula, we derive another formula: Earnings = Management x Character x Character.

The portfolio of Berkshire consists of 5 stocks that make up some 70% of the entire portfolio (Please see comments for a slight correction). Certainly, we do not see diversification here. If you know what you are buying, what’s stopping you from buying more of something that is of value? Finding a good stock is already difficult. How are you going to find 20 good stocks if you limit yourself to 5% of your portfolio for any stock?

On the other hand, if you do not know what you are doing or understand what you are buying, you are taking a big risk!

The seminar started at 0900hrs inside one of the rooms at Suntec Convention Centre. Looking around, I think there were about 100 people in the room. I met up with my university friend who was also one of the participants but I didn’t see the guy whom I saw at the preview.

Among the participants were also Wendy Kwek and Ken Chee of Executive Directions. Ken always had plenty of questions for Robert throughout the seminar.

For the introduction, we were supposed to write down in our workbook what we already knew (K) about Warren Buffett, Berkshire Hathaway and value investing as well as what we wanted (W) to learn. At the end of the day, we will write down what we have learned (L). It’s represented neatly by the term KWL.

This was followed by an outline of the seminar objectives and expectations. All were pretty realistic objectives with no signs of any quick rich methods.

I had been seeing the same old advertisement in the newspapers for a few days promoting this particular seminar by Robert P. Miles. Well, it won’t hurt to go for the preview. I should have something to learn from this guy since even Warren Buffett endorses his books.

12th Oct 2005. I was walking around at Bugis Junction when someone came up to me to ask for directions to Parkview Square. Hmm..isn’t that the venue of the preview seminar? I found out that he was also going to the preview. Unfortunately, I didn’t know where Parkview Square was at that time and couldn’t give him the directions he asked for.

Fast forward 2 hours….

The preview was a bit of a disappointment. It was essentially that, a preview. Robert was telling us the things that he will be covering during the actual seminar. Nevertheless, the steerling records of Warren Buffett presented during the preview continued to amaze me. And the cost of attending the seminar? $538. At the preview, there was a special promotional price of $488. And if I could get a group (2 or more) to sign up together, the cost would only be $450.

As fate would have it, the person who was asking me for directions earlier on was also there and wanted to sign up. So, we did the smart thing and signed up together to get the group price of $450. There was something wrong with the credit card reader though and he didn’t manage to complete the transaction. I didn’t hang around to find out what happened to him in the end.

Hmm.. $450 for a one day workshop would be a reasonable price to pay if I could pick up a couple of good ideas from it. My investments had not been doing well lately and I certainly needed a nudge in the correct direction. And what better way to get the nudge than from the world’s greatest investor?